Wall Street Pennywise
Derry, Maine is a fictional, picturesque small town created by Stephen King. On first impression, it seems like the American Dream: cozy single-family homes, where you know your neighbors and kids can safely ride their bikes around town.
The problem is, every 27 years, a bunch of kids go missing. The culprit is an evil entity called “It”.
“It” feeds on FEAR, and takes the shape of whatever people FEAR most. Every 27 years, “It” returns to feed in Derry, Maine. The shape “It” takes is Pennywise the Dancing Clown. Scary indeed.
In the 2017 film, It, Pennywise torments the kids in the “Loser’s Club”, leading to several killings. Pennywise is able to neutralize the adults in town, making them completely unaware of what is going on. This makes it easier for him to scare and feed on children.
Stanley, member of the “Loser’s Club”, realizes this, “When you're a kid, you think that you'll always be... protected, and cared for. Then, one day, you realize that's not true. If you open your eyes, you will see what we're going through. 'Cause when you're alone as a kid, the monsters see you as weaker. You don't even know they're getting closer. Until it's too late.”
Fortunately, the kids are able to figure out Pennywise is preying on their FEAR of it. No longer afraid, the kids defeat Pennywise.
On Wall Street, two emotions drive everything: FEAR and GREED. With all the talk of recession and bank runs lately, FEAR is taking over. Maybe you’re like the “Loser’s Club”, realizing the adults aren’t there to always protect you.
FEAR in this context happens a lot more frequently than every 27 years. There is always something to be scared of in financial markets, if you let it.
Consumers need to be careful who they are listening to, or it can lead to mistakes that will cost you in the long run. It is tough to know the difference between someone who is looking out for your best interests, and a Wall Street Pennywise who is looking to profit off of you.
Many in financial media and financial services try to use FEAR to push consumers to take an action, usually to buy a financial product.
Structured notes are an example of a product that gets sold during these times of FEAR. If you don’t like big swings in your portfolio, you may be offered one of these products.
A common type of structured note gives an investor exposure to a market index (like the S&P 500) over a predetermined time frame (24 months is common) and an options strategy overlay to limit your losses (downside market protection). This is very attractive during FEARful times, when your gut is telling you to limit the damage to your portfolio.
The catch is, your upside return is usually capped. So if the stock market returns to prosperity during the term of the structured note, you won’t realize all the gains, leaving you worse off. The people who make out best here are the person who sold you the product for a commission and the company that offered it.
Structured notes are just a tool. In a vacuum they are not bad. The issue I have is how and when they are sold, too often taking advantage of a customer’s FEAR. Don’t let FEAR push you into something complex /or expensive, when simpler and cheaper routes exist. This is just one example of the tactics of Wall Street Pennywise.
So, what is the BEST way to combat FEAR in personal finance?
Figure out what you want to accomplish in life and what matters to you. Write it down.
Educate yourself on the basics of personal finance. Learn continuously.
Try to understand the incentive structures in different areas of the financial services industry.
As author Ramit Sethi says, focus on getting life’s big money decisions right (car, housing, education, etc.) and don’t obsess as much over small ones (coffee, avocado toast, books, etc). Don’t be “penny wise and pound foolish”.
All of these will lead to more confidence in your financial situation.
Don’t let Wall Street Pennywise profit from your FEAR. Now that you know what “It” preys on, you don’t have to be scared.
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